Sections
Key Terms
Key Terms
- actual rate of return
- the total rate of return, including capital gains and interest paid, on an investment at the end of a period of time
- bond
- a financial contract through which a borrower such as a corporation, a city or state, or the federal government agrees to repay the amount that was borrowed plus a rate of interest over a period of time in the future
- bond yield
- the rate of return a bond is expected to pay at the time of purchase
- bondholder
- someone who owns bonds and receives the interest payments
- capital gain
- a financial gain from buying an asset, such as a share of stock or a house, and later selling it at a higher price
- certificate of deposit (CD)
- a mechanism for a saver to deposit funds at a bank with the promise to leave them at the bank for a time, in exchange for a higher rate of interest
- checking account
- a bank account that typically pays little or no interest, but that gives easy access to money, either by writing a check or by using a debit card
- compound interest
- an interest rate calculation on the principal plus the accumulated interest
- corporate bond
- a bond issued by firms that wish to borrow money
- corporate governance
- the name economists give to the institutions that are supposed to watch over top executives in companies owned by shareholders
- corporation
- a business owned by shareholders who have limited liability for the company’s debt, yet receive a share of the company’s profits; may be private or public and may or may not have publicly traded stock
- coupon rate
- the interest rate paid on a bond; can be annual or semiannual
- debit card
- a card that lets the person make purchases, and the cost is immediately deducted from that person’s checking account
- diversification
- investing in a wide range of companies to reduce the level of risk
- dividend
- a direct payment from a firm to its shareholders
- equity
- the monetary value a homeowner would have after selling the house and repaying any outstanding bank loans used to buy the house
- expected rate of return
- how much a project or an investment is expected to return to the investor, either in future interest payments, capital gains, or increased profitability
- face value
- the amount that the bond issuer or borrower agrees to pay the investor
- financial intermediary
- an institution, such as a bank, that receives money from savers and provides funds to borrowers
- high-yield bonds
- bonds that offer relatively high interest rates to compensate for their relatively high chance of default
- index fund
- a mutual fund that seeks only to mimic the overall performance of the market
- initial public offering (IPO)
- the first sale of shares of stock by a firm to outside investors
- junk bonds
- see high-yield bonds
- liquidity
- refers to how easily money or financial assets can be exchanged for a good or service
- maturity date
- the date that a bond must be repaid
- municipal bond
- a bond issued by cities that wish to borrow
- mutual funds
- funds that buy a range of stocks or bonds from different companies, thus allowing an investor an easy way to diversify
- partnership
- a company run by a group as opposed to an individual
- present value
- a bond’s current price at a given time
- private company
- a firm owned by the people who run it on a day-to-day basis
- public company
- a firm that has sold stock to the public, which, in turn, can be bought and sold by investors
- risk
- a measure of the uncertainty of that project’s or entity's profitability
- savings account
- a bank account that pays an interest rate, but withdrawing money typically requires a trip to the bank or an automatic teller machine
- shareholders
- people who own at least some shares of stock in a firm
- shares
- the stock of a firm, divided into individual portions
- simple interest
- an interest rate calculation only on the principal amount
- sole proprietorship
- a company run by an individual as opposed to a group
- stock
- a claim on partial ownership of a specific firm
- Treasury bond
- a bond issued by the federal government through the U.S. Department of the Treasury
- venture capital
- financial investments in new companies that are still relatively small in size, but that have potential to grow substantially